Employment Dynamics in Germany:Lessons to be Learned from the Hartz reforms

Günther Schmid

Keynote to the conference“Employment: Challenge for Sustainable Economic

Development in the MENA Region” Organized by GTZ Sector Network Istanbul, 6th to 8th November 2007

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The basic elements of employment dynamics

The wealth of nations is always

“regulated by two different circumstances; first, by the skill, dexterity, and judgement with which its labour is generally applied; and second, by the proportion between the number of those who are employed in useful labour, and that of those who are not so employed”(Adam Smith, The Wealth of Nations, 1776/1937, vol. 1, p. VII)

Germany successful in quantity but not in quality

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Stylised facts of German employment dynamics: I

Economic growth 2.9% (2006) and first half 2007 Government deficit melting down to zero Employment intensive growth > 1 million Unemployment down by > 1 million Employment rates of ‘old’ workers up by 15

percentage points since 2000 Self-employment up to 10.4%

However, all that glitters is not gold

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Stylised facts of German employment dynamics: II

Low productivity dynamics (1.6% D; 2.4% USA) Increase of precarious non-standard employment High unemployment rates of low-skilled people High regional disparities in unemployment and

employment dynamics Low employment rates of low-skilled people Women still disadvantaged in terms of wages

and good jobs What are the factors that ensure sustainable employment?

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An Analytical Framework of Employment Dynamics

External& InternalShocks

International Relations and Endogenous Changes

Interaction ofAgents guided by Institutions

Labour Market and Employment Policy

► Demography► Migration► Work Preferences

Supply Shocks

► Education & Skills► Social Security► Employment Protection

Supply

Employability

► Globalisation► New Technologies► Consumer PreferencesDemand Shocks

► Technology & Capital► Effective Demand► Employment Regulation

Demand

Productivity

Inactive Population

Active Labour Force

Goods & Services

InvestmentEmployment

Wages

Work

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Determinants of positive employment dynamics

Successful strategies depend on the proper interaction of institutions that influence employability on the labour supply side and productivity on the labour demand side.

Employability depends obviously on education & skills, but less obviously and much contested also on social security and employment protection.

Productivity depends obviously on technology & capital, but less obviously and much contested on effective demand and employment regulation.

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Flexicurity Proposition

Neither the regulation nor the deregulation theory provide and adequate analytical framework.

It is flexicurity systems based on complementary institutions that enhance both flexibility and security in employment relationships.

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What explains Germany’s success and failure?

Institutional conditions and reactions to supply and demand shocks (I):

‘External Shocks’: Eurozone, East Germany ‘Internal Shocks’: individualisation, mobility Wages: efficiency wages, weakening unions Regulation: some deregulation, vices and virtues

of employment protection

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What explains Germany’s success and failure?

Institutional conditions and reactions to supply and demand shocks (II):

Welfare state: main concern is cost side Labour market policies: misused for parking Education & skills: exclusion of low skilled Political economy: high interest in status security

Weak: public investment; financing welfare state

Strong: vocational education; social partnership

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Main reforms in German employment policies

Promoting business start-ups for unemployed Promoting minijobs, midijobs and temporary jobs Activating unemployed through workfare plus ... Improved job matching through modernised PES Merging unemployment and social assistance

Weak: activating and merging

Ambivalent: marginal and temporary jobs

Strong: business start-ups

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Lessons to be learned: I

General Lesson: Why flexicurity systems? Institutions ensure negative and positive freedom

demand and supply perspective Negotiated flexicurity

negotiated flexibility, negotiated flexicurity Flexicurity options

good practices in Denmark and Germany

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Lessons to be learned: II

Specific lessons: Self-employment as stepping stone to

entrepreneurship or regular employment Modernisation of employment services

job matching and employability measures Flexibilisation through variable contracts

minijobs, midijobs, temporary work combined with new securities

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Lessons to be learned: III

Lessons through failures (1): Avoid fragmented responsibilities

Establish accountable administrative structures Don‘t cut short-term unemployment benefits and

expenditures on active labour market policies

Both have to be considered as investments Don’t neglect effective demand

Keynesian demand management still valid

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Lessons to be learned: IV

Lessons through failures (2): Don’t burden the shoulders of workers too much

Broaden income base for financing social security and make work pay

Don‘t set unrealistic full-employment goals

Broaden the opportunity set of employment in the lifecourse and make transitions pay